Nubank Gets Wall Street Nod as Growth Seen Justifying Valuation

(Bloomberg) -- Latin America's most valuable financial company Nu Holdings Ltd. gained after analysts initiated coverage with mostly positive views, saying stronger growth prospects justified its valuation premium to peers. 

Analysts from Morgan Stanley to Goldman Sachs Group Inc. see upside potential of as much as 71% from Friday's close. The consensus rating -- a proxy for its ratio of buy, hold, and sell ratings -- is 4.44 out of five, Bloomberg data show. Shares closed 6.4% higher to $9.98 in New York Monday.

Nubank raised over $2.5 billion in the fifth-largest U.S. IPO of 2021, blowing past traditional Brazilian banks like Itau Unibanco Holding SA and Banco Bradesco SA in market capitalization. It now trades at a large premium to its regional fintech peers, but roughly in line with global names, Morgan Stanley analysts led by Jorge Kuri wrote in a report. 

“Growth at Nubank is anticipated to far outpace the global peers, hence arguing for a premium valuation,” Kuri said, initiating coverage with an overweight rating and price target of $16. 

Nubank, which counts Warren Buffett's Berkshire Hathaway Inc. and SoftBank Group Corp. among its backers, reached 48.1 million customers as of September. That should surge to 108 million by 2025 as the company ramps up its offering of financial products, Goldman Sachs estimates. 

KeyBanc, which also initiated Nubank at overweight, said its price target of $12 implies a 2023 enterprise value-to-gross profit of 21 times, toward the upper end of the range of a peer group of modern fintech providers. That is warranted given Nubank's growth profile, analysts including Josh Beck said. 

Read More: Nubank Analysts to Weigh Premium to Rivals After Blockbuster IPO 

To be sure, a key risk to the growth path is a worsening macroeconomic scenario in Brazil, where the firm gets most of its revenue. The country is coping with surging interest rates and high inflation, with some economists expecting it to slip into recession this year. 

“We are more concerned about worsening asset quality as consumer's ability to pay declines and deceleration in loan demand” is expected, HSBC analysts led by Neha Agarwala wrote in a report, justifying their hold rating. 

For Goldman, Nubank's proprietary technology platform and a low market share might allow it to grow even amid a challenging backdrop in Brazil. 

“The company has shown good historical asset quality trends, given its extensive use of artificial intelligence, data analytics and behavioral finance,” analysts including Michael Ng and Tito Labarta said. “Growth can be counter-cyclical.”

©2022 Bloomberg L.P.